Caixin
Oct 25, 2019 08:51 PM
OPINION

Opinion: The Knock-On Effect of Sino-U.S. Soybean Tussle

Photo: VCG
Photo: VCG

Soybeans have taken center stage in the ongoing U.S.-China trade war. If the trade war was resolved and trade reopened in the next year or two, the supply-demand balance could likely return to normal. If the conflict continues for an extended period, it could change the structure of the market entirely.

As of now, the knock-on effects of restricting trade of the largest U.S. agricultural export have rippled out into the global soybean industry, spilling over into its supply chain, fertilizer market, crop science, animal health and biofuels.

The trade war is not directly impacting the fertilizer market, as both the U.S. and China are exporters and make most of their own fertilizer. Indirectly, though, the change in crop planting by U.S. farmers has a knock-on effect on the domestic fertilizer industry. As tariffs on soybean exports to China have forced farmers to rethink planting patterns, the changing mix of crops impacts the nutrients required.

As a legume, soybeans absorb nitrogen from the atmosphere and do not require additional nitrates. However, like most agricultural crops, soybean yield is significantly improved with phosphates and potash. The reduction in soybean planting has led to oversupply in the domestic fertilizer market.

However, with Brazilian farmers stepping in to fill the gap in China’s soybean imports, U.S. phosphate and potash producers have increased exports to Brazil. Compared with Atlantic market rivals Russia and Morocco, the U.S. is better-positioned to serve the South American market, due to reduced shipping costs.

Developments in the U.S. and China were already affecting the global crop-protection market long before the tariff war began. Ongoing U.S. legal cases for glyphosate, the largest-selling herbicide in the world, as well as some other herbicides, cast doubts about the potential of these active ingredients for manufacturers internationally — not just in the U.S.

Furthermore, the global market’s reliance on the Chinese manufacturing sector for agrochemical products left it vulnerable to developments within China. Stricter environmental laws within China drove many smaller companies out of the market, which in turn increased international product prices.

Then the trade war began exerting an influence. China is the manufacturing hub for the global pesticide industry, accounting for around 25% of all production. The 10% tariffs implemented in 2018 mainly impacted formulated products being imported into China, leaving imports of most of the large-selling actives such as glyphosate and chlorpyrifos out of the tariff net.

But the latest round of tariffs includes some of those active ingredients as well. With these tariffs, most U.S. companies would have to pass the increased costs on to farmers, which in turn would impact sales. Additionally, as China’s demand for U.S. soybeans disappears, many U.S. farmers have adjusted their crop plantings. This in turn has changed chemical requirements and demand for particular products.

While tariffs have not hurt the vaccination or pharmaceutical markets of the U.S. and China, the indirect impact on this market is already apparent. Animal health companies in China almost exclusively serve the domestic market, with animal vaccines produced to protect the Chinese livestock population.

Although not regarded as being as high in quality compared to international products, Chinese products are significantly cheaper for small farms to buy. The exception is farmers’ purchases of vaccines for fast-spreading diseases that could quickly wipe out an animal population. For example, Chinese pig farmers are increasingly purchasing doses of foot-and-mouth disease vaccines from international businesses. This trend ties into the wider soybean-led trade war.

Agribusiness Intelligence estimates that since its initial outbreak in China in August 2019, African swine fever (ASF) has lead to the deaths of around 30% of the Chinese hog population. It also has spread to several other countries. As soybeans make up the largest proportion of hog feed, there is notably less demand for soybeans from Chinese farmers.

There is no available ASF vaccine and the launch of such a product is estimated to be five to seven years away. Thus, the contribution of the country’s hog population to soy demand will not support pre-trade war import volumes, even if the trade war concludes.

The U.S. ethanol industry has reached the climax of a crisis that had been building over the last two years. Political decisions were made to support the oil industry even when reduction in demand from China was already hurting U.S. producers.

In August, the U.S. Environmental Protection Agency granted 31 exemptions to small oil refiners. The waivers free them from an obligation — under the country’s renewable fuel standard policy — to blend biofuels such as ethanol into the gasoline they produce. The latest round of exemptions brings the total to 85 since President Trump took office in 2017.

Earlier waivers already led to significantly reduced demand for ethanol, creating a disastrous psychological effect on the U.S. ethanol industry. In fact, several players have said they will shut down or reduce production at their facilities.

Up to 40% of U.S. corn is used for ethanol production, and many farmers that planted both corn and soybeans had increased their volumes of corn after the 2018 tariffs were imposed on U.S. soybean exports to China. The increase in corn production exacerbated the issues of the ethanol industry — introducing more goods to an export market hit by reduced demand just as the trade war halted exports to China.

In 2017 the Chinese government announced plans to roll out nationwide use of car fuel containing 10% ethanol by 2020, in a bid to reduce pollution and smog in urban areas. Although ethanol can be produced domestically, the build-out of production capacity has not been fast enough to meet the deadline.

With the U.S. offering the cheapest source of ethanol internationally, early 2018 saw record U.S. exports of ethanol to China. Before the tariffs, full-year 2018 exports would have totaled over 500 million liters.

If the trade war came to an end and the export market reopened, Chinese demand for U.S. ethanol could increase by 1 billion to 2 billion liters a year. This would in turn help to rebalance the U.S. supply-demand issue. Only time will tell whether the key players decide this is in their best interests.

Christoph Berg, Sanjiv Rana, Joe Harvey, Alberto Persona, Roger Bernard are researchers at Agribusiness Intelligence of IHS Markit, a London-based agricultural information service provider.

Contact editor Lu Zhenhua (zhenhualu@caixin.com)

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